Monday, March 25, 2013

Vodafone news of the day

Reuters today have a piece out on the Vodafone-Verizon issue. To quote:

By Kate Holton, Chris Vellacott and Sinead Carew

(Reuters) - Almost five years after taking the helm at the world's second-largest mobile phone company, Vittorio Colao doesn't want to be the third Vodafone boss to be stumped by its seemingly intractable U.S. 'problem'.

The urbane Italian, who has streamlined a company built on the foundations of aggressive expansion, is exploring what to do with the one remaining asset he does not control - the stake in U.S. operator Verizon Wireless, which makes up about 75 percent of the firm's value.

On paper Colao has several options, each with pros and cons: sell all or part of the stake to majority owner Verizon Communications, maintain the status quo in the face of Verizon's desire for a deal, or sell Vodafone in its entirety to Verizon.

I desire problems like Vodafone's intractable "US problem".

The US problem is that they own - but do not control - an asset that has appreciated, appreciated some more and gone up a bit after that.

Most of Vodafone's shareholders would love to have that problem because Vodafone has fallen a bit, got a little depressed, then gone into a decline and - well - recovered somewhat in recent years because it got just too cheap. And it had distributions from its US operation to fund its dividend. If Vodafone did not have its US problem its stock price might resemble France Telecom by now...

But with an asking price for Vodafone's 45 percent stake in Verizon Wireless around $115 billion and a potential $20 billion tax bill on the capital gain, Vodafone investors worry that Verizon may not be willing to pay enough for a business it already controls.

No. What Vodafone investors are scared of is that Vodafone will sell its best asset grotesquely tax-inefficiently to buy inferior assets at prices two turns higher.

The inability to do that so far has been the US problem in a nutshell. The US problem is the only thing that has saved the shareholders here.

Verizon has one huge advantage in this deal. They are dealing with self-centered imbeciles rather than shareholder focused players. Later in the article they say:

Vodafone has lawyers from Linklaters, bankers from UBS and consultants from McKinsey looking at deal options and structure, and for ways to reduce the tax bill, according to three people familiar with the situation.

It is not clear how a large proportion of any capital gains tax liability could be mitigated while allowing Vodafone to make a clean break from US. Even if a feasible solution could be found we disagree with the bull-case view that any point of tax law would be clear cut. In our view, Vodafone could face protracted debate with tax authorities, something we believe it wants to avoid.

But even this analyst is not correct. What our "urbane Italian" wants is to avoid isn't difficulties with the IRS. It is being shafted when he sells the business which belongs to shareholders (including my clients).

Personal concerns for employment for Vodafone's board and management - not tax - is the issue here.

Don't you think VZ has an equally strong need for a deal? $8bn pa in minority leakage to fund its own not especially well covered dividend, a wireline business which constantly disappoints and also carries an $8.5bn unfunded pension + $24bn healthcare liab. Buying VOD and later spinning off international is a way of dealing with these, get 100pct of a great business cheaply, as well as hugely accretive, etc.

Stir them up as much as you like, but VOD mgt knows well that a merger is the only endgame. Financially they can easily be settled with tiny fractions of the numbers you are talking...

Why is the debate not simply what is VZ mgt waiting for? And why are they considering Europe to be an impediment to a deal?

Is there a rule against acquiring Vodafone while including a spinoff clause in the merger agreement? They could guarantee Colao would remain as Vodafone CEO through the changes and spin it off a set period later.

I would have thought you could carve Vodafone into two corporations on a tax free basis and then amalgamate the Verizon piece with Verizon on a tax free basis.

As for buying off management - I'm all for it. It would have been cheaper to "buy off" Saddam Hussein than it was to invade Iraq. It would have been cheaper to "buy off" the North Vietnamese leadership than it was to fight the Vietnam War.

Here's a thought - you should push the Russians who formerly had joint ownership of TNK-BP to get involved / buy out Vodafone. They have a history of negotiating hard with JV partners, as well as dealing with complicated asset structures. And they're flush with cash....

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